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Sunday, November 18, 2012

The Trader's Mind X - The transition to success

So now that you understand the differences in psychological makeup of a new trader versus a successful trader, let's see how to transition your mind from the former to the latter.

Replace lust with caution and skepticism
The very first step is to limit the number of trades you take. When traders say that overtrading is a very common trading error, thats only half-correct. Many of the ills of trading poorly show up as overtrading. By limiting the number of trades you can make, you prevent the amount of damage you can do to your account in one sitting. But more important, your mind needs to shift from getting into this move to getting into the biggest move of the day. Since there are only one or two big moves in the first couple of hours and perhaps another in the last hour and half, your approach switches to looking for quality trades and large swing trades.

What this means for your account is that despite a low win rate, you can still be a profitable trader if your wins are at least twice as large as your losses. Your goal as a new trader should be to exclusively focus on large moves. If you are unsure the move is going to be large, its ok not to take the trade. Don't worry if you stand aside and the move ends up being big. That is part of trading. Learn to let it go. Similarly, you will be stopped out a couple of times and the very next move will be large (or not). That's ok. You are in the process of learning to judge exactly where the large move is. With experience it will come naturally (but not without sufficient screen time).

Replace fear with discipline
Once your discrimination and judgement get better, your larger wins and smaller losses will make you a better selector of trades however, your trade management needs to be extremely disciplined. Note that as long as you are trading in a trend (HH and HL or LL and LH) with volatility (decent size swings and bars) and near support (TL/ema/swingpoint), your chances of success should be slightly greater than 50% at the very least. Add good pattern and signal bar and your win rate should be around 60% or even more. Your decision to enter the trade is all the processing your mind needs to make. Once you set a stop and target, do not change them. Your mind is vulnerable when in a trade and susceptible to errors of judgement. You should simply let the math work for you and let the market either fill your target or take your stop out. If your setups are truly 60%, you will accumulate winnings in the long run.

Replace desperation with acceptance
Many professionally successful people who come to trading believe rightly that perseverance is a virtue and its their dogged persistence that made them successful. Realize that in trading, perseverance is inapplicable and desperation is probably what you will slip into. Learn to accept that today is a losing day and stop trading. Take a trading buddy's help if you wish. Disclose your losing trades and let them tell you to stop. Soon, you will be able to stop on your own. Similarly, do not be overconfident on successive wins and end up taking untested setups. Many traders have their large losing days right after their large winning days. If you are susceptible to these, just take a day off or only take one trade the next day after a big winning or losing day, win or lose.

Refine your method continuously
Over time, you can make slight changes to the above rules and fine tune your setups. For example, you should always keep track of the success rate of your individual setups and your average win or loss per setup. That way, passing a lower expectancy setup or taking a good setup with a questionable signal bar become easier. Always keep your trading goals in mind when you refine your methods. For example, you should prefer to refine your system for higher probability than to get a better price since adding a contract to a higher probability trade is a better way to make more money than getting an extra couple of ticks on existing size.

Over time, your approach and mental state will shift to that of a successful trader. However, this is not easy and will be a constant struggle. Even after you have been winning for a while, its possible to have slip ups and lapse into your old habits. You should always be on guard and protect your mind from harmful habits as long as you are a trader.